The Ignorant Investor

Wow. Up 3% on the NASDAQ and 2% on the Dow. I don't see why, since the Fed did exactly what most people have been expecting, and there's nothing in the news today that wasn't apparent yesterday.

As you can see, posting over the past two weeks has been non-existent. It's not just because I'm busy at work, either. I've just got nothing to say about this market. It seems to be getting more volatile and more confused. I get the sense that the traders are in charge. People focused on the next three months, trading on the trends rather than on a long-term outlook. I've gotten to the point where I can't watch closely, because when traders are running amok all they're talking about is how to make a quick buck, and I don't know how to play that game.

So I took a step back today and looked at the basics. Oil prices are still high. Inflation is still around. Interest rates are going up. The housing market is slowing. The dollar is falling, which will make imported goods (and parts) more expensive. From the standpoint of conventional wisdom, those are some pretty tough headwinds going into the end of the year.

Wow. Big day. A bigger pop than I expected. I didn't trade during the big drop (though I was finally tempted on Monday, and that should be a lesson for me to remember) or buy in on the dip. I'm still sticking with my plan of putting money into short term bond funds and the S&P 500.

The big increases today came in the exact same areas that were the worst hit over the past week or two- emerging markets, Europe and Japan, gold, small caps. The S&P went up, too, but less. So basically what we appear to be seeing is a lesson in the concept of volatility. I think it's only going to get worse. The long term investors seem cautious to me, and they're not worried about losing out on a double digit increase for the year. So the big piles of cash they have sitting on the sidelines probably will stay there earning what now amounts to decent interest. If you're looking at a 8-9% increase in equities but can get 5% on a short term bond with no risk, you're not going to dump equities altogether, but you'll probably increase your allocations to bonds. And to push the market up sharply, you want people to be going for broke on equities.

Rising interest rates. Rising inflation. Historically high energy prices. These might not kill the economy, but history indicates that at best they'll add drag on the market. At the least, the market will expect them to add drag, and that ends up in something of a self-fulfilling prophecy.

But that will take a while to bleed the market dry of its blood lust. Right now we retracing some ground on the same sectors that have been hot for the past couple of years. We saw huge runups, gave up some gains in a sell off. Now it's anybody's guess what comes next. It's really a traders market: people will make money predicting the daily ups and downs with short term trades, but the long term investors like me are just going to be stuck in a holding pattern.

Over the past couple of months I noted that a lot of sectors were overvalued and that I'd stick put some profits I made in some long-term trades into the S&P, simply based on the idea that it hadn't shot up with the other sectors like gold, emerging markets, energy, etc. and so offered a higher probability for returns.

Well, obviously we're in a widespread downward swing in the market, and everything is tanking. But of the "tankees", the S&P 500 has tanked a lot less. It's down only a percent or so for the year, which isn't too bad. Even Intel is up a little today. So I dodged some bullets by staying away from gold, commodities, and the overseas markets. Whether they now offer a more compelling buy is the big question. As always, what happens now is no longer important. The past is dead. It's what's coming down the road in six months or a year that counts.

I don't expect to escape this current bust up unscathed. Nor do I have the kind of cajones needed to move into cash completely in the hope I can time the swing back up when it comes. I honestly don't know what the next six months hold. I anticipate a sideways market for the foreseeable future. Down a lot, up a lot, down a lot. But I don't know any more than anyone else does. So I have to spread the bets across the table.

The gold and commodity bulls are out in droves declaring the power of the long term trend up for precious metals and materials. If I have to hear the line, "In the past, every commodity bull market lasted 15-20 years; we're only in the first few years of this one," one more time, I'm going to punch someone. That's not analysis- that's mechanically looking at a past trend to predict a future one. And if the past set the future, history would end up symmetrical and constant.

Down another percent and a half as of writing. P/E on trailing earnings at 13.33 with a 2.20% yield. This stock has been a huge loser recently, and the long drawn out slide in this stock shows just how sour Wall Street has gotten on big cap tech.

Yes, I understand that Intel and Microsoft are no longer the huge growth stocks that they once were. They're now cyclicals tied into capital spending and business investment, just like any other equipment maker. But there's a point where you have a company that has little debt, good cash flow, etc., and you have to wonder why its being valued so far beneath the rest of the market. A pretty young lass she may no longer be, but can she have turned into an ugly stepsister as the market seems to think?

With this drop, I may have to buy in here. Not with the hope of seeing some huge rocketing in the share price. But just counting on a little return to rationality. A move from the current P/E to that of the market - from 13 to 17 or 18, would bring about a 23% return.

Or I may hesitate and stay in cash. If a solid if currently uninspired company like Intel can get this kind of treatment from the market, it might signal what's down the road for the major stock averages overall.

The Wall Street Journal has an article today that notes American investor's enthusiasm for new stock issued by the Bank of China. In the past year, two other Chinese banks have gone public, and their shares have soared. So naturally when people get a shot at owning shares in the biggest bank in China, they go a little crazy. China is growing, they think. It's hot. And the Bank of China is right in the middle of the hottest economy on the globe. It's risky, sure. But how bad can the risk be?

For me, it's a matter of restating the term "Bank of China" into more specific, descriptive terms. When I see Bank of China, what I hear is: "Largely state owned bank, run by chinese communist, that is part of web of local financial institutions with notoriously lax lending standards, fraud, cronyism, and poor risk management in a country that has no disinterested regulatory body like the SEC or FDIC." Now what about that sounds attractive to anyone who doesn't have the risk appetite of a Vegas gambler or cliff divers in Brazil?

Thinking of it that way makes it a lot easier for me to give it a pass. Banks and corporations in this country are shifty enough even with all our regulations and government oversight. I can't imagine what it's like to be around quasi-capitalists in an institution that is essentially subject to no rules but it's own. If I really wanted to invest in China, I'd pick some kind of index fund/ETF like iShares FTSE/Xinhua China 25 index fund, which tracks 25 of the largest, most liquid companies in China. Or, probably a more conservative choice, a managed mutual fund like Fidelity's China Region Fund. The managed fund will cost more in expenses (1.16% of assets per year, according to the Journal), but active management may add a level of local knowledge that adds value in what are to me utterly unfamiliar markets.

Note that investing in these markets is not for the faint of heart. After a strong run up, there's a good argument that they're fully valued and not worth the risk of the high volatility they've displayed in the past. For instance, today the Associated Press reported:

HONG KONG (AP) -- China's benchmark stock index marked its biggest one-day drop in more than four years on Wednesday as investors sold shares to gather cash for upcoming IPOs, while other Asian markets continued slides fueled by worries that higher U.S. interest rates might slow global growth. . . China's benchmark Shanghai Composite Index dropped 5.33 percent to 1,589.55, the index's biggest daily fall since Jan. 28, 2002, when it fell 6.33 percent. The Shenzhen Composite Index fell 5.79 percent to 405.88.

Swings of this magnitude tend to play havoc with the emotions of our inner worrier. I'm giving China a pass right now, though I may come back to the issue later.

Via the Associate Press, the Maestro testifies before the Senate Foreign Relations Committee, giving them the unique insight that only his decades of experience as an economist and banker allows:

Former Federal Reserve Chairman Alan Greenspan said Wednesday that while the country has been able to absorb sharp increases in oil prices, the high energy costs are beginning to stunt economic growth.

Seems like I could have told them this myself, and I don't have any knowledge of economics beyond what I picked up from listening to Marketplace and reading the business section of the New York Times. Coming up next: Greenspan notes that if we see wages increase substantially, then inflation will become a problem. And that if you stick your finger into a light socket, you will get a bad shock.

Classic.

Is that when the democrats eventually return to power they'll have a huge amount of room to raise taxes to cover the deficit without hurting the middle class. The cuts in the capital gains tax rate and the soon-to-be-permanent end to the estate tax, a tax which applies only to dead people who left more than $4 million in assets, have made the future rise in taxes to be, at least initially, a politically painless process for any Congressman who isn't beholden to the wealthiest of contributors.

Hmm. Maybe I've spoken too soon. How many politicians are there these days whose power doesn't somehow stem from regular and massive infusions of campaign cash from the wealthy?

I've been looking at new cars for service as the family truckster. Nothing fancy, just a mid-sized front-wheel drive sedan in the range of $19,000-20,000 dollar. The car of the middle class from the section of the auto market in which sales are measured in the hundreds of thousands every year.

I own a 9-year old Toyota with 130,000 miles on it now (yes, I admit it- I'm a tightwad- so what? You wanna fight about it?), and I'm thinking of driving down to the Toyota dealer to buy another one. But given the state of our economy, I want to be open to buying an American vehicle. So I read up today on Chevy's new Impala sedan. Solid reviews, decent price. And made in Canada. Meanwhile, the new Toyota Camry I've been looking at is made in a Toyota factory here in the United States.

So which of these is the American car? The one made by the corporation headquartered in Michigan but built by foreigners, or the one designed by the Japanese corporation but built by the American auto workers? Good luck figuring out that question. It's one of those "if a tree falls in the forest but no one is there to hear it fall, does it make a sound?" questions (by the way, the answer to the latter question is 'yes' despite what a lot of nerdy philosophy majors would have you believe)